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For KSL Holdings Limited’s (SEHK:8170) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. The beta measures 8170’s exposure to the wider market risk, which reflects changes in economic and political factors. Different characteristics of a stock expose it to various levels of market risk, and the market as a whole represents a beta of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.
See our latest analysis for KSL Holdings
An interpretation of 8170’s beta
With a five-year beta of 0.01, KSL Holdings appears to be a less volatile company compared to the rest of the market. The stock will exhibit muted movements in both the downside and upside, in response to changing economic conditions, whereas the general market may move by a lot more. Based on this beta value, 8170 appears to be a stock that an investor with a high-beta portfolio would look for to reduce risk exposure to the market.
Does 8170’s size and industry impact the expected beta?
With a market cap of HK$1.73B, 8170 falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, 8170 also operates in the construction industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the construction industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by 8170’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How 8170’s assets could affect its beta
During times of economic downturn, low demand may cause companies to readjust production of their goods and services. It is more difficult for companies to lower their cost, if the majority of these costs are generated by fixed assets. Therefore, this is a type of risk which is associated with higher beta. I examine 8170’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. Since 8170’s fixed assets are only 1.95% of its total assets, it doesn’t depend heavily on a high level of these rigid and costly assets to operate its business. Thus, we can expect 8170 to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. This is consistent with is current beta value which also indicates low volatility.